Approaches of Organizational Control
Case: Using Control at J.P. Morgan
In October 2006, the head of the mortgage-servicing department, which collects payments on home loans, informed J.P. Morgan CEO Jamie Dimon that late payments were increasing at an alarming rate. When Dimon reviewed the report, he confirmed not only that late payments were a problem at Morgan but also that things were even worse for other lenders. “We concluded,” recalls Dimon, “that underwriting standards were deteriorating across the industry.” Shortly thereafter, Dimon was informed that the cost of insuring securities backed by subprime mortgages was going up, even though ratings agencies persisted in rating them AAA. At the time, creating securities backed by subprime mortgages was the hottest and most profitable business on Wall Street, but by the end of the year, Dimon had decided to get out of it. “We saw no profit, and lots of risk,” reports Bill Winters, co-head of Morgan’s investment arm. “It was Jamie,” he adds, “who saw all the pieces.”
Dimon’s caution—and willingness to listen to what his risk-management people were telling him—paid off in a big way. Between July 2007 and July 2008, when the full force of the crisis hit the country’s investment banks, Morgan recorded losses of $5 billion on mortgagebacked securities. That’s a lot of money, but relatively little compared to the losses sustained by banks that didn’t see the writing on the wall—$33 billion at Citibank, for example, and $26 billion at Merrill Lynch. Citi is still in business, thanks to $45 billion in cash infusions from the federal government, but Merrill Lynch isn’t—it was forced to sell itself to Bank of America. Morgan, though hit hard, weathered the storm and is still standing on its own Wall Street foundations. “You know,” said President-elect Barack Obama as he surveyed the damage sustained by the U.S. banking industry in 2008, “… there are a lot of banks that are actually pretty well managed, J.P. Morgan being a good example. Jamie Dimon … is doing a pretty good job managing an enormous portfolio.”
Ironically, Dimon got his start in banking at Citibank, where he worked closely with legendary CEO Sandy Weill for 12 years, helping to transform what’s now known as Citigroup into the largest financial institution in the United States. Dimon left Citi in 1998 and, two years later, became CEO of Bank One, then the country’s fifth-largest bank. He sold a revitalized Bank One to J.P. Morgan Chase in 2004, and in 2006, he became CEO and chairman of J.P. Morgan Chase & Co., a financial-services institution, which includes J.P. Morgan Chase Bank, a commercial-retail bank, and J.P. Morgan Trust Company, an investment bank. With assets of $176.8 billion, J.P. Morgan Chase boasts the largest market-capitalization and deposit bases in the U.S. financial industry.
Dimon came to J.P. Morgan Chase with a few ideas about how to manage an enormous portfolio. Shortly after he took over, he increased oversight and control of Bank One’s operations and expenses, using cost-saving measures to free up $3 billion annually by 2007. He then used the cash to finance the expansion of Morgan Chase operations, including the installation of more ATMs and the creation of new products. As improved fundamentals and expanded operations yielded greater revenues, the bank’s stock price went up (at least until the subprime crisis hit), freeing up further funds for new growth. Once the basics are right, says Dimon, “you earn the right to do a deal,” and he set about building a Citi-like financial empire, relying mostly on mergers to jump-start growth in underserved regional and international markets.
Experience had shown Dimon that a large organization “can get arrogant and … lose focus, like the Roman Empire.” In 2006, for example, J.P. Morgan Chase was enjoying high sales but spending a lot more than Dimon was used to spending at Bank One. Moreover, Dimon had inherited a company that had engineered multiple mergers without making much effort to integrate operations. The twofold result was ho-hum profits and a loose collection of incompatible structures and systems. Financial results from different divisions, for instance, were simply being combined, and the upshot, according to CFO Michael Cavanagh, was that even though “strong businesses were subsidizing weak ones … the numbers didn’t jump out at you. With the results mashed together, it was easy for managers to hide.”
Dimon thus set out to exercise more effective operational oversight, and his control practices currently extend to virtually every aspect of J.P. Morgan Chase operations:
- Every month, managers must submit 50-page reports showing financial ratios and results, product sales, and even detailed expenses for every worker. Then Dimon and his top executives spend hours combing through the data, with the CEO asking tough questions and demanding frank answers.
- One of Dimon’s top priorities is slashing bloated budgets. “Waste hurt[s] our customers,” he reminds his management team. “Cars, phones, clubs, perks— what’s that got to do with customers?” He’s also eliminated such amenities as fresh flowers, lavish expense accounts, and oversized offices and closed the in-house gym. One time, he asked a line of limousine drivers outside company headquarters for the names of the executives they were waiting for. Then he called up each one, asking, “Too good for the subway?” or “Why don’t you try walking?” Dimon denies the story, but limo service at J.P. Morgan Chase is way down.
- Dimon also takes a close look at compensation. Regional bank managers at J.P. Morgan Chase once earned $2 million a year, compared with Bank One’s modest salary of $400,000. “I’d tell people they were way overpaid,” says Dimon, and, as he suspected, “they already knew it.” He cut pay for most staff by 20 to 50 percent, but most people elected to stay with the company. Today, a strict pay-for-performance formula keeps compensation in line.
- “In a big company,” Dimon advises, “it’s easy for people to BS you. A lot of them have been practicing for decades.” So he gathers outcome data from every manager, various forms of information from lowlevel staffers, and even candid performance critiques from suppliers. “If you just want to run your business on your own and report results,” warns Steve Black, co-head of investment banking, “you won’t like working for Jamie.”
- Finally, Dimon is convinced that IT is critical to the bank’s long-term strategy and once cancelled a longrunning information-services contract with IBM. “When you’re outsourcing,” he explained, “… people don’t care” about your performance. At J.P. Morgan Chase, “we want patriots, not mercenaries.” Between 2007 and 2008, he invested $2 billion in technology developed in-house and considers it money well spent.
Dimon, however, doesn’t like being thought of as a control freak. “It’s offensive … to be called a cost cutter,” he complains, and besides, his long-run goal isn’t merely control—it’s growth. “It’s thousand-mile march,” observes one J.P. Morgan analyst, “and not everyone will survive.”
Case Questions
- In what ways is Jamie Dimon’s approach to management pretty much what you’d expect of a top-level manager in the financial industry? In what ways is it different from what you’d expect?
- Under what circumstances might Dimon need to change his approach to organizational control?
- Explain how Dimon has practiced each of the following levels of control at J.P. Morgan Chase: (a) financial, (b) structural, and (c) strategic. Then focus on operations control: What steps has Dimon taken to exercise each form of operations control—preliminary, screening, and postaction?
- What aspects of Dimon’s approach to control were important in steering J.P. Morgan Chase through the subprime crisis that crippled or toppled other financial institutions?
- Under what circumstances might Dimon need to change his approach to organizational control?
